The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

Tax (Photo credit: 401(K) 2012)

In response to criticism that he hasn't clearly laid out an agenda for a potential second term, yesterday President Obama released "A Plan for Jobs and Middle Class Security," an 11-page pamphlet filled with fancy pictures of all the things that make America great: old folks, rolled up sleeves, children flashing gap-toothed smiles, and Southern back-alley dog fights. OK, I made that last one up.

If you could turn away from the high-gloss images long enough, you could actually find some of the President's policy positions as well, including plans for the economy, education, health care, and of course, taxes.

The President's tax policies were not self-contained as one agenda item, however, but rather interspersed amongst his various goals for a second term. As a result, in order to understand whether the publication contains any new tax proposals, we must take a look at each of the President's policy items containing tax provisions, zero in on the related tax proposal, and then address exactly what is being proposed and whether it reflects new policy or a simple restatement of what we've heard before.

Goal: Creating 1,000,000 new manufacturing jobs by the end of 2016:

Tax Proposal #1:

Reforming the corporate tax code to bring down tax rates – cutting tax rates on domestic manufacturers by nearly a quarter – while closing tax preferences and loopholes to pay for it.

Within the report, President Obama proposed reducing the maximum corporate tax rate from 35% to 28%, with a reduction to a top rate of 25% for manufacturers. This rate reduction would be paid for through base-broadening -- the elimination of deductions and loopholes. If this sounds familiar, it's because Mitt Romney has proposed this same reduce rates/cut deductions approach for personal tax reform.

And for all the criticism Romney has faced for failing to provide the necessary details regarding which deductions and preferences he would eliminate in order to make his 20% across-the-board reduction to the personal income tax rates revenue neutral, President Obama's plan for corporate reform shares the same shortcoming. While it is estimated that reducing the top corporate rate from 35% to 28% would cost the government at least $727 billion in tax revenue over the next decade, the President's proposal, as currently constructed, does not provide nearly enough detail regarding which deductions would have to go in order to offset that lost revenue. In the little detail the President does provide, however, it appears he would take aim squarely at the high fallutin', oil drillin', private jet flyin' segment of the population by eliminating the following preferences:

Loopholes for corporate jet depreciation. Current law allows corporate jets to be depreciated over five years, while the jets used by airlines to carry passengers must be depreciated over seven years. The President would close this loophole, requiring corporate jets to be depreciated over the same number of years as other aircraft.

The deduction for intangible drilling and development (IDC) costs and percentage depletion in the case of oil and gas wells. The current expensing of IDCs or 60-month amortization of capitalized IDCs would no longer be allowed. Instead, IDCs would be capitalized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with generally applicable rules. In addition, the percentage depletion method available under existing law for recovery of the capital costs of oil and gas wells would no longer be allowed. Instead, taxpayers would be permitted to claim cost depletion on their adjusted basis, if any, in oil and gas wells.

The preferential treatment currently afforded owners of certain "carried interests' in investment partnerships. This has been bandied about for years, and it appears President Obama is dead-set on making it happen. Current law allows a private equity fund manager -- think Mitt Romney in his pre-political life -- who receives an interest in a partnership as compensation for their management services to recognize the income that flows to them from the partnership based on the character of the income earned at the partnership level. Because the majority of income earned by a private equity fund is dividends and long-term capital gains -- both of which are currently subject to a preferential 15% tax rate -- these service partners can effectively convert what many believe should be ordinary compensation income taxed at 35% into investment income taxed at a mere 15%. It is this preference, above all other tax planning measures, that explains Romney's much-ballyhooed 13% effective rate for 2010 and 2011, as he continues to benefit from carried interests he received years ago. The President would do away with this treatment of carried interests and tax all income allocated to a partner from an interest granted in exchange for management services as ordinary income subject to self-employment tax. For more on carried interest, click here.

Now, here's the bad news. According to the President's own scorecard, eliminating these deductions would raise only a paltry $171 billion in tax revenue over the next 10 years. That's not quite going to offset the $727 billion in lost revenue resulting from the 7% reduction in the top corporate tax rate.

As a result, much like Mitt Romney's personal tax plan, the President's math simply doesn't work. Making matters worse, the Joint Committee of Taxation issued a report stating that in order to pay for a reduction of the top corporate rate to 28%, Congress would have to eliminate virtually all corporate tax deductions, including those for domestic manufacturing, the very industry President Obama aims to protect with the reduction in rates.

This is where things can get tricky. Depending on which deductions are in fact eliminated, certain industries may benefit from those preferences more than others. As a result, these industries may actually see their corporate tax bill increase, despite the reduction in their top marginal rate from 35% to 28%, because they've been hit hardest by the President's base-broadening measures.

To his credit, the President's framework does address some additional options for preference elimination in very broad terms, including the possibility that corporate deductions for interest expense could be limited or eliminated, and current fixed asset depreciation schedules could be extended in an effort to pay for the rate reduction.

Even with these possibilities left open, however, considering the President is forecasting a $6.6 trillion deficit over the next decade, coming up $550 billion short of revenue-neutral corporate tax reform is probably not the smartest policy.

Tax Proposal #2:

Ending tax deductions for companies shipping jobs overseas, and using the savings to create a new tax credit for companies that bring jobs home.

What it Means:

This was a recurring theme for President Obama throughout the debates, and these proposals can be viewed both broadly and narrowly.